Mac backers still believers

NWT minister: Mackenzie gas line economics strong; Imperial remains committed

Gary Park

For Petroleum News

Take a break from the relentless stream of doom and gloom.

Two of those most closely connected to the Mackenzie Gas Project are not ready to cut and run.

Northwest Territories Industry Minister Brendan Bell said the economics underpinning development of Mackenzie Delta gas are as strong as ever, not least because of an expected 1.1 percent annual rise in North American gas consumption over the 2003-2030 period.

“But we can’t sit here and assume it will happen,” he told Petroleum News.

Pius Rolheiser, a spokesman for Mackenzie lead partner Imperial Oil, said the company remains as committed to the project as it has from the outset.

“If we weren’t we wouldn’t be doing the work we are,” he said in an interview.

Bell: imported LNG, Alaska line contribute to urgency

He conceded that a year ago he would have hoped “we could have been farther along,” but it was not possible to foresee a court challenge from the Dene Tha First Nation over a connection from the Mackenzie Valley pipeline to the pipeline network in Alberta.

Topping his list of milestones that must be passed over the next year are final regulatory decisions allowing the project proponents to decide by mid-2008 whether to embark on construction.

He credited the National Energy Board, which concluded almost a year of hearings in mid-December, with doing a “wonderful job of making sure that everybody who wanted to be heard was heard from.”

Although the Joint Review Panel, which is charged with weighing the environmental and socio-economic issues, has postponed the conclusion of its hearings from December to April, Bell said he hopes the panel will submit its report to affected cabinet ministers in time for them to react and the NEB to deliver an overall verdict by early 2008.

On the cost front, he is anxious to “get a better sense of what the project will cost,” once Imperial Oil presents an updated budget to the NEB in February or March.

“Hopefully they will not face the cost overruns of the oil sands, but the project does not exist in a vacuum,” meaning it has to overcome the challenges of hiring and retaining labor, Bell said.

Rolheiser: proponents exploring alternatives

Those options have included conversion of Mackenzie gas into liquefied natural gas or building a lateral pipeline to connect in the Yukon with an overland Alaska pipeline.

Each time the partners have concluded that the original plan remains the best approach, he said.

But the search for cost-saving measures has raised the possibility of shortening the pipeline construction to two winter seasons from three — an idea Bell said would not encounter any opposition from the NWT government.

Whatever the options, Rolheiser said Imperial has felt from the outset that actual construction of the pipeline would be the “simplest part” of a project that would be “unprecedented in its complexity.”

“It has been as complex as we expected ... and more,” he said, drawing special attention to the challenge of building and maintaining a consensus among the stakeholders.

While focused on its internal issues, the proponents “absolutely need the regulatory decision (covering the conditions that must be met) and realistically we are looking for that in early 2008,” he said.

Negotiated settlement possible with independents

Although the two sides appear to have reached an impasse, Rolheiser, without getting into confidential matters, said a negotiated resolution is still possible.

Bell said he is “not entirely sure” what stands in the way of a deal, but made it clear he would prefer the two sides come to terms rather than take the case to the NEB.

For the NWT government, access to the Mackenzie pipelines for producers outside the core gas owners’ group is essential if the MGP is to be the catalyst for what Bell has described as “the next great oil and gas producing basin in Canada.”

In his final testimony before the NEB, he made a forceful point that the MGP can be a basin-opening project only if it takes into account “more than the specific interests of the project proponents.”

While there has been a drag on the regulatory process, Imperial quietly resumed talks with the Canadian government in October on royalty and tax terms for the MGP after calling a halt in mid-June, but Rolheiser said that until definitive project costs are available “it is difficult to have detailed discussions.”

What emerges from any decisions on the fiscal regime is of special interest to the NWT government which is determined to see control over natural resources devolve from the Canadian government, although at this stage Bell said the NWT is prepared to hold back “until we have a better sense of what the project would cost.”

Bold new energy firm makes northern debut

MGM Energy made its debut Jan. 11 as a spinout from Paramount Resources and has started trading on the Toronto Stock Exchange.

Its assets are dominated by 1.02 million gross acres in the Mackenzie Delta under a farm-in agreement with Chevron Canada Resources and 1.48 million gross acres in the Colville Lake area of the Mackenzie Valley.

Both regions are bursting with potential, but ultimately held back until a pipeline network is built.

MGM’s newly appointed President Henry Sykes, formerly president of ConocoPhillips Canada, told shareholders there is a “significant opportunity” beckoning in the NWT, where (other than a pocket of drilling in the Norman Wells area of the Central Mackenzie Valley) the region has logged only one well for every 260 square miles compared with an average one well for just under every square mile in the Western Canada Sedimentary Basin.

Two wells this winter

MGM is backed by some positive exploration successes in Colville Lake, where a partnership with Apache drilled and cased two wells in the Nogha prospect in 2003 and followed up with two delineation wells in 2004.

McDaniel and Associates, after independently reviewing the Nogha results, assigned possible raw gas reserves of 250 billion cubic feet to a 17,000 acre area.

Paramount has been active in gas hearings

Like other independent companies in the Mackenzie Explorer Group it has voiced concern about the inability so far to settle on the terms of gaining access to the proposed pipeline systems for companies outside those who own the Delta’s three anchor fields — Imperial Oil, Shell Canada, ConocoPhillips Canada and ExxonMobil Canada.

Under the Chevron/BP pact, MGM is committed to drill 11 wells over the next four years, including a drilling budget of C$80 million to complete four wells in 2008, Sykes said.

But he voiced a degree of unease over costs, expressing a hope that as MGM’s northern activity increases there is both the challenge and the opportunity to reduce operating costs.

A report by investment dealer Peters & Co. said MGM’s position is bolstered by a large undeveloped land holding and significant farm-in upside that provides exposure to vast gas exploration potential in the Mackenzie Valley and Delta.

Countering that, the risk of further delays in approval and construction of a Mackenzie pipeline raises near-term financing risks as MGM deals with a limited annual operating window in the NWT, slowing the pace of development.

But Sykes was emphatic that MGM’s strategy is to build on its land interests in the Mackenzie Valley and central NWT, either directly or indirectly.

He said development of Canada’s North is only a matter of time, meaning those who are in place first will be able to reap the rewards.

—Gary Park